Starting A Housing Bust From Scratch

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Growing up in Harlem in 1977 everyone felt there was serious racial discrimination by banks with branches in the neighborhood. There is no doubt getting a loan was impossible even if you had an account at the bank and a steady job.

Fast-forward to 2007 and the start of the Great Recession and everyone in my old neighborhood in Harlem felt there was serious racial discrimination by banks with branches in the neighborhood for making loans too easy to get. Even people that didn't have bank accounts or a steady job often were able to live the American dream with no money down.

Obviously, these statements seem contradictory but in a nation of victimization it makes perfect sense. There is no doubt even opening a bank account at the large banks outside my neighborhood was lined up with a ton of discouraging hurdles back in the early 1980s. I found a nice bank and began saving. If a bank or a store or a product-maker doesn't want my money they never have to say it more than once.

It wasn't enough for people to decide to pull accounts from banks that didn't serve their needs, the federal government decided to step in with the Community Reinvestment Act (CRA) of 1977. The intention was to prohibit interstate banking of those banks that were not making credit available in local communities. The law didn't impact credit much and there was little oversight. This gave the Clinton administration the excuse to add jet fuel to the program.

Every president likes to point to greater homeownership as a sign of success. If you could stoke racial animosity along the way then that was simply a bonus.

In 1995 Bill Clinton began tinkering with the CRA to give it teeth by examining the process and revving up the intimidation. The micromanagement process started the ball rolling but it was only when HUD directed Fannie Mae and Freddy Mac to buy loans riskier than their original charters intended that the bubble began to inflate. By 2001 the industry came up with creative ways to monetize these loans that saw down payments drift to as low as 3%, and eventually no money down, to no money down but money back programs.

I can tell you right now if blacks and Hispanics were not invited to that party there would have been protest and scandal.

The run from 2001 to 2007 was simply amazing. Home prices swelled and soon everyone was not just a homeowner but flipping homes and making money. What a wonderful time.

It couldn't have been possible without federal government forcing banks to make high-risk loans, only to ratchet the game higher by turning GSEs into Yucca Mountains for what turned out to be toxic debt. Without these repositories there is no way the housing bubble inflates to its unfathomable size.

There is plenty of evidence that traces the housing bubble to CRA, reenergized by Bill Clinton and enjoyed by George Bush who watched homeownership reach all-time record levels. By forcing banks to come up with "flexible" and "innovative" lending the government provided the lifeline to the ultimate Frankenstein's monster.

Fannie Mae and Freddy Mac ultimately made these subprime loans 50% of their purchases and their failure rate was significantly higher than other loans, particularly as the air initially began to seep out.

I won't act like there weren't a lot of racial hurdles back in 1977 but Jimmy Carter was such a terrible president that nobody was doing well. His war on fossil fuels sparked the decline of domestic production and reliance of foreign supplies. Unemployment was skyrocketing and the only thing moving swifter was the rise in crime. The answer was harsh punishment rather than business-friendly policies that would have lifted all ships.

The Aftermath

You could count on one hand the number of people in America not negatively impacted by the housing bust.

Senator Obama who originally got into the presidential race as the anti-war candidate saw his chance and Wall Street, banks and capitalism became public enemy number one. In fact, the term "unfettered capitalism" became the euphemism for erecting giant walls around commerce and slipping into a socialist agenda - all in the name of the people... all in the name of fairness. You, know, much like the thinking back in 1977. I actually think Carter meant well whereas it was clear to me this administration was looking to make the most of a crisis.

You never let those things go to waste, after all.

So you could imagine my shock yesterday when word came out the administration is encouraging banks to make high-risk loans. In fact, the Justice Department is promising no action for such loans that default. I'm not sure about the dangerous rhetoric that comes with inevitable default. I am sure this is amazing hubris and hypocrisy. These loans will be facilitated through the FHA, which has already seen its balance sheet balloon just like that of the Federal Reserve.

Right now it's a little nudging and promises of immunity but with first time buyers of existing homes actually decreasing in the past year there may be a little arm-twisting to get banks to take risk. But what about all that other stuff, the giant agencies and mountain of rules, who knows? It was all about controlling an industry second, winning an election first. Anyway, the aftermath of round two would mean another bank bailout and more government control.

It's what a politician might call a win-win.

Danger Signs

While there is no doubt saber rattling by North Korea and movement of anti-ballistic missiles to Guam shook an already vulnerable market, for me the danger sign came from the ADP jobs report.

Construction jobs vanished. What happened? I don't think it's about Sandy as major construction hasn't even begun in parts of New York and New Jersey. Yet there is a clear arc that seems to have spiked after the tropical storm ripped the northeast but to decline to zero jobs created last month is remarkable ... and scary. How real is the housing rebound?

This adds a layer of concern and tightens the knot in the stomach ahead of tomorrow's government jobs report.

Charles V. Payne is a regular contributor to the Fox Business and Fox News Networks. He is also the Chief Executive Officer and Principle Analyst of Wall Street Strategies, Inc. (WSSI), founded in 1991 which provides subscription analytical services to both individual and institutional investors.